News of Note
Swift – Tax Court of Canada references the Coates test that a builder is not required to self-assess on building a home for his own occupation even where there may be a secondary resale intent
Email this ContentOver a 23-year period, an individual, who through a wholly-owned company (“TSC”) carried on a small construction business, bought and sold five homes in the Victoria, B.C. area. The fourth property was bought as a vacant lot in October 2009, commenced to be occupied by him and his family a year after a home had been erected and was sold three years later due to financial pressure on the taxpayer resulting from a business downturn.
Sommerfeldt J accepted the individual’s testimony that the fourth property “was… intended to be occupied as a residence, i.e., for personal enjoyment” and “as his dream home” and found that there was no adventure (or business). Accordingly, Sommerfeldt J found that the individual had not constructed that property as a builder and, in particular, not as part of an adventure in the nature of trade or in the course of a business, so that the individual was not required to self-assess under s. 191(1) upon substantial completion and occupancy.
Sommerfeldt J then considered the exception in ETA s. 191(5), which provides that an individual builder is not required to so self-assess where “after the construction … of the complex … is substantially completed, the complex is used primarily as a place of residence for the individual [or family].” He quoted the conclusions of Hogan J in Coates that:
[S]ubsection 191(5) … requires … a simple factual determination as to whether or not the property was used as a family home after it was substantially completed. …
[T[he exception cannot be interpreted as requiring that the property have been built only for purely personal reasons. This means that an individual can benefit from the exception even if he has the secondary intention, at the time of its construction, of reselling the property, provided he actually uses it as a place of residence after the construction is completed.
Sommerfeldt J then stated:
[T]hey used the ... Property primarily as a place of residence. Thus, Mr. Swift has satisfied the test enunciated in Coates.
Unlike Coates, this was not an informal procedure case (a distinction to which CRA, if noone else, pays heed).
Neal Armstrong. Summary of Swift v. The Queen, 2020 TCC 115 under ETA s. 123(1) – builder – (f) and s. 191(5).
CRA ultimately concludes that a loss that was suspended under s. 40(3.5)(c)(i), could not be de-suspended by a DLAD winding-up of the CFA referenced under s. 40(3.5)(c)(i)
A Canadian corporation (ACo) realized a suspended loss when it contributed its shares (i.e., in a drop-down to which s. 85.1(3) did not apply) of a controlled foreign affiliate (CCo) to another CFA (BCo), and then CCo was then liquidated under s. 95(2)(e) into BCo. In 2017-0735771I7, Headquarters considered that such loss was suspended on the basis that, for purposes of s. 40(3.5)(c)(i), Bco was a corporation “formed” on the “merger” of CCo with BCo – with the result that BCo was deemed to continue to own the shares of CCo with which it was affiliated, notwithstanding that CCo had, in fact, ceased to exist.
Headquarters was subsequently asked in 2019-0793481I7 to consider the consequences of ACo dropping its shares of Bco under s. 85.1(3) into another ACo CFA (DCo) followed by a sale by BCo of its subsidiary (Fco - whose decline in value had caused the decline in value of its own shares) to an arm’s length purchaser, and then by the wind-up of BCo into DCo and into another CFA (ECo) through which DCo had held part of its intrest in BCo. Headquarters concluded that this resulted in the loss being de-suspended, stating that “[u]pon the completion of the liquidation of BCo, it would no longer be affiliated with ACo,” so that the suspended loss was deemed to be a capital loss of ACo immediately after the completion of the liquidation of BCo.
Headquarters has now realized that such winding-up of BCo likely is a “designated liquidation and dissolution” described in s. 95(2)(e) )– in which event, s. 95(2)(e)(v)(A)(III) would deem DCo to be a continuation of BCo for s. 40(3.5)(c) purposes respecting shares that were deemed under that paragraph to be owned by BCo before the DLAD (i.e., respecting its deemed continued ownership of the CCo shares) – so that the loss on the CCo shares continued to be suspended.
Neal Armstrong. Summary of 29 July 2020 Internal T.I. 2020-0852071I7 under s. 95(2)(e)(v)(A)(III).
Income Tax Severed Letters 21 October 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Vincent – Court of Quebec imputes use of the firm’s Quebec establishments to a “silent” partner having departed from KPMG Canada to France in ousting a Quebec-France Treaty exemption
In May 2012, a Quebec-resident lawyer, who theretofore had been a partner of KPMG Canada, became a resident of France and started working at KPMG France. Despite his departure, Vincent received payments from KPMG Canada of $84,721 for 2013 and $58,936 for 2014, which were described in the Quebec tax-reporting slips issued by KPMG Canada as having been paid to him as a “silent partner” (“associé passif”). He was unsuccessful in getting KPMG Canada to change this description on the slips.
Art. 14 of the Income Tax Convention between France and Quebec only exempted income derived by a resident of France from a “liberal profession” (such as law) where such income did not relate to a fixed base used by the French resident in Quebec in exercising such profession. After quoting a statement in Dunne, 2005 QCCA 739 that “when dealing with a firm, all the members, including a member not residing in Quebec, carry on the business of the firm and thereby exploit all of the firm’s establishments there,” Lareau JCQ indicated that the two amounts allocated to the taxpayer thus were taxable to the taxpayer if he was a member of KPMG Canada in 2013 and 2014. As the taxpayer did not provide any evidence on this point other than a copy of his letter of resignation, the taxpayer failed to make this case, and his appeal was dismissed. (Lareau JCQ also made the questionable statement that the taxpayer and the ARQ were bound by the “partner” label in the tax-reporting slips issued by KPMG Canada, given that the taxpayer had not secured its change.)
Neal Armstrong. Summary of Vincent v. Agence du revenu du Québec, 2020 QCCQ 3605 under Treaties – Income Tax Conventions – Art. 7 and s. 96(1)(f).
Rousseau – Quebec Court of Appeal finds that the Court of Quebec lacked jurisdiction to consider a source deduction issue
The taxpayer, who had been employed in Alberta and been subject to source deductions based on the federal and Alberta rates, was found by the Court of Quebec to be a Quebec resident. The taxpayer now submitted that the Court of Quebec should have recognized his right to deduct the Alberta portion of the source deductions made to CRA. The Court of Appeal rejected this submission on the basis that, under the Quebec equivalent of ITA s. 171(1) (TAA s. 93.1.21), the Court of Quebec lacked jurisdiction to consider this issue. After referring to federal decisions taking a similar approach (including Boucher and Paradis), the Court stated:
The same result applies here. The jurisdiction of the Court of Quebec under TAA section 93.1.21 is limited to the assessment by the Minister.
Neal Armstrong. Summary of Rousseau v. Agence du revenu du Québec, 2020 QCCA 1308 under s. 171(1).
We have translated 6 more CRA Interpretations
We have published a further 6 translations of CRA interpretations released in December, 2009. Their descriptors and links appear below.
These are additions to our set of 1,297 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Biya – Tax Court of Canada finds that a taxpayer who worked on a long-time basis in Ethiopia with a home there nonetheless resided in Canada
The taxpayer came to Canada from Ethiopia in 1981 but, following his separation from his wife, worked in Ethiopia from 2006 to 2015 for Canadian-headquartered companies while maintaining a home with a live-in girlfriend there. MacPhee J found that the taxpayer nonetheless continued to ordinarily reside in Canada in light of his continued substantial personal ties with Canada including friends and three children, as reflected in the fact that in 2013 (the taxation year in issue) he spent almost as much time in Canada as in Ethiopia. In addition his pay cheques were deposited in Canada. MacPhee J stated that the taxpayer might also be resident in Ethiopia, given that “a party can be a resident in two places at the same time,” but that if instead there had to be a finding of a single country of residence, the evidence was “stronger in support of his residence being in Canada, as opposed to Ethiopia.”
Neal Armstrong. Summary of Biya v. The Queen, 2020 TCC 113 under s. 2(1).
Sun – Tax Court of Canada finds that there was a supply of a condo directly from the builder to the assignee of the purchase contract for GST new housing rebate purposes
One of the requirements for the GST (or Ontario HST) new housing rebate is that there be a sale to the purchasing individual by the “builder.” An individual successfully argued that he acquired his condo from the builder rather than from an individual from whom he was assigned the purchase agreement, notwithstanding that he did not give the proper notice of the assignment to the builder (but at the closing, the builder agreed to transfer title directly to the individual anyway).
Neal Armstrong. Summaries of Sun v. The Queen, 2020 TCC 112 under ETA s. 254(2)(a) and s. 254(2)(d).
CRA indicates that the s. 125.7(4)(d) election is not available for a multi-tiered chain of entities that are not dealing with each other at arm’s length
Para. (d) of the definition of “qualifying revenue” excludes from that term amounts derived by the eligible entity from persons or partnerships not dealing at arm’s length with it (“NAL entities”). However, s. 125.7(4)(d) provides an exception. For example, s. 125.7(4)(d) could permit a management company, that has steady year-over-year management fees earned exclusively from a NAL entity, to benefit from the CEWS (wage subsidy) if it makes a joint election with that entity and the latter has a significant decline in qualifying revenue.
CRA has indicated that s. 125.7(4)(d) was not available in the situation where all of Canco’s revenues were derived from manufacturing and selling products to Forco A which, in turn, finished the products and sold them to Forco B (which, like Forco A, was a related foreign corporation), for sale to arm’s length customers. The reason is that Forco A was the only NAL entity from whom Canco directly earned qualifying revenues (and, thus, the only entity with which it could elect), and Forco A had no qualifying revenues because all of its revenues were earned from a NAL entity (Forco B).
CRA extrapolated from this example, stating:
[T]he election in paragraph 125.7(4)(d) may not be made by a multi-tiered structure or chain of entities that are not dealing with each other at arm’s length.
Essentially the same statement was added on October 6 to the CRA FAQ CEWS webpage (Q.8-02), without garnishment with the above or any other factual example.
Neal Armstrong. Summary of 28 September 2020 External T.I. 2020-0851731E5 under s. 125.7(4)(d).
Bouclair – Court of Quebec orders a stay of a federal tax evasion prosecution based on an ARQ audit file gathered for Quebec civil penalty purposes
A Revenue Quebec audit team gathered incriminating evidence respecting the alleged diversion of company funds to pay for the construction of a chalet for its CEO (by allegedly paying false invoices directed to it by the builder). RQ did not accord any of the Jarvis protections to the company and its CEO, because it had no intention of criminally prosecuting – it was content to impose the equivalent of s. 163(2) penalties (in addition to the tax) – as did CRA, a year later, following the RQ lead.
However, in a bizarre twist, several years later, the CRA Investigations Division, in order to find sufficient work for its investigators, began selecting closed files for which s. 163(2) penalties had been imposed, for criminal investigation – which in this case, consisted mostly of asking the RQ for a copy of much of its file (a transmission of information which Galiatsatos JCQ found to be contrary to the intergovernmental agreement), and then executing searches on the company premises as well as those of the builder. The company and CEO then were charged with tax evasion under the ITA.
Galiatsatos JCQ acknowledged that, in a dry technical sense, perhaps CRA had not violated the Jarvis protections as conventionally expressed as it itself had not used any of its audit powers. However, he stated that he could not “condone … a practice” of using a “treasure trove of ready-made files for ‘investigation’ and prosecution containing uncautioned conscripted evidence,” as “otherwise, the Jarvis protections simply melt away.”
Here, the usual remedy of simply excluding evidence under s. 24(2) of the Charter was not a satisfactory solution as RQ likely would have audited the builder regarding the chalet even if it had observed Jarvis. Galiatsatos JCQ took the further step of ordering a stay of the prosecution, stating:
[S]hould the State choose not to engage the criminal process despite obvious signs of criminality, thereby choosing not to offer constitutional protections, it is expected that is will in turn choose to forego criminal prosecution. In order to ensure that the taxpayer’s constitutional rights are respected, such a broad discretionary decision must have a built-in mechanism by which it ensures that the taxpayer will not later be prosecuted on the basis of the fruits of such an expansive audit. …
Considered as a whole, the history of this investigation directly harms the integrity of the justice system and irreparably compromised the community’s sense of fair play and decency. Alternative remedies are insufficient to redress this prejudice. Even if much of the evidence is excluded under s. 24(2), the case would still be viable, since a significant portion of the evidence was deemed admissible by this Court.
Neal Armstrong. Summary of R. v. Bouclair Inc. (2020), 500-73-004592-180 (Court of Quebec) under s. 231.1(1).